Thursday 30 September 2010

Don't privatise government-owned banks too soon

The nationalisation of banks as a result of the global economic crisis has been a source of controversy. In an article in VOX that draws on some recent research on government owned banks, Svetlana Andrianova, Anja Shortland and I argue that governments should not feel pressured to re-privatise the banks.

Once the black sheep of high finance, government owned banks can reassure depositors about the safety of their savings and can help maintain a focus on productive investment in a world in which effective financial regulation remains more of an aspiration than a reality.

Further reading:
Svetlana Andrianova Panicos Demetriades Anja Shortland
"There should be no rush to privatise government owned banks", VOX, 20 January 2010.

http://www.voxeu.org/index.php?q=node/4647

Creditor Protection and Financial Development in India

In a recent short article in Economics Letters, co-authored with Simon Deakin, Law professor at the University of Cambridge, and Gregory James, Lecturer in Economics at Loughborough University, we utilise a new longitudinal dataset to show that strengthening creditor rights in India during the 1990's and 2000's led to an increase in financial development.

The creditor protection index that we use has been developed by Professor Deakin's team of lawyers at Cambridge. It draws on a wider range of legal materials and a more finely-grained approach to coding than earlier studies by La Porta and co-authors. Specifically, three sub-indices are coded, pertaining to 'debtor control', 'creditor contracts' and 'insolvency law'. Each of the sub-indices contains information on ten or more variables. Professor's Deakin's team has published the index from the mid 1970's to the present day for France, Germany, India, the UK and the US.

Econometric estimations establish that there is a long run relationship between banking sector development and creditor protection. These variables are positively related to GDP per capita, resulting in the co-evolution between the banking system and the real economy. However, when it comes to stock market capitalisation, we find that it is negatively related to banking system development, suggesting there is crowding-out between these two components of the financial system.

Further analysis using the sub-index on creditor contracts suggests that as banks become more significant lenders they press for laws that protect secured credit more effectively. Thus, the evolution of the law itself is part and parcel of the process of financial development.

The work was funded by the ESRC's World Economy and Finance Programme.

The full details of the paper are as follows:

Simon Deakin, Panicos Demetriades and Gregory James "Creditor Protection and Banking System Development in India", Economics Letters, vol. 108, 19-21, (available online at Science Direct).